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The Daily Reckoning | Wednesday, April 6, 2011
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Going Up? Tracking Gold’s Rise Against Faux Money and Fiat Currencies
Reporting from Buenos Aires, Argentina...
Joel Bowman
Gold $1,460...Oil $109 (Brent $123)...Dow 12,400...
Good Golly...what isn't going up?! Commodities...equities...monies. They're all on the march.
Yes, you read that right, Fellow Reckoner. Money is going up too. It's going to the moon...and back. We mean real money, of course...not that flim flam fiat junk the Feds pass off as cash. We're talking about gold. Gold and, to a lesser extent, silver. Look above at that first number again. Quite a bit higher than the $1,150 per ounce the Midas metal fetched a year ago, eh? Or the $650 it went for five years back? Or the $250 mark, where it started the new millennium.
[Silver, by the way, has performed even better. As we write this morning, an ounce of gold's perennial bridesmaid is just a few dimes shy of $40 per ounce...quite a ways from the $5 per ounce at which it began the millennium.]
And all this while the naysayers were out with their...well, naysaying.
"Gold has no industrial use," they said. "It is a relic of the past...a 'barbarous' throwback to a bygone era."
Leaving aside for a moment the fact that gold does have industrial uses (albeit in a relatively limited area), the fact remains that gold's primary function in an economy is as money, not as circuitry, dentistry or other.
Why? As Aristotle explained more than a few years ago, gold is the best money because it exhibits the necessary characteristics that make an acceptable money more so and better than any of the known alternatives. That is, it is durable, divisible, consistent, convenient, and has value in itself. In our time, as in that of the Ancient Greeks, we have come across no more reliable store of value, no superior medium of exchange, than this simple, humble, nobody-else's-debt metal. While substitutes are invariably debased, debauched and devalued, gold mostly just keeps to itself, watching with amusement as the government-issued paper currencies commonly used to measure it dance in the wind, whimsical as the empty political promises that back them.
As Doug Casey explains, "The paper we use today is a medium of exchange - it got that way because governments made it illegal not to accept it - but it's not a good store of value. And it's rapidly and radically becoming less of a store of value. What we use as money today is actually not money; it's currency. Technically, that's simply a word that indicates a government substitute for money."
So yes, gold is up...as measured in dollars. More correctly, substitute money is down...and headed much lower before this plays out once more as it always, everywhere does...
More on stuff that's going down in tomorrow's issue but, for now, let's check back in with Bill, who has Part II of his "Turning Japanese" essay below. (If you missed Part I, you can read it here.)
Enjoy...The book the US Congress never wanted you to see...
Ron Paul's "Lost" Gold Bible
Buried away in secret since late in the last century, this 200-page guide shows you:
We're spreading the word...and so, until TODAY April 6, 2011, you can claim a copy of this long "lost" Gold Bible - Absolutely FREE. Find Out How Here.The Daily Reckoning Presents As Japan Goeth...So Goeth the US
The US now finds itself in much the same fiscal boat as Japan. America's "stimulus" efforts have become permanent, structural elements of the economy.
Bill Bonner
Since November, the Fed has injected about $4 billion a day into the economy through its QE2 program. And the federal government gives the economy almost another $5 billion worth of deficit spending a day. Together, this is $63 billion going into the economy each week.
In time of emergency - in a war, say - you would expect the feds to do extraordinary thingsfor a short time. But now - with no war...and no national emergency...no recession...and no end in sight - the authorities are subsidizing the economy with a combined fiscal and monetary boost equal to more than $2 trillion a year! And that doesn't include the effect of zero interest rates.
Not surprisingly, these massive stimulus efforts require equally massive borrowing efforts. Talk about crowding out! The government has completely displaced the private sector from the credit markets. As the chart below shows, as of last year public sector borrowing had been more than 100% of total domestic credit for two consecutive years.
This presents a problem. To fund this public sector borrowing, Washington must either borrow someone else's savings (or borrow directly from the Federal Reserve by way of debt monetization). The Japanese are a "go-to buyer" of US Treasurys (and the second largest holder of US government paper after China). But in view of the recent devastation, as well as the decline in savings and the rise in its own deficits, Japan is unlikely to continue to be a major source of financing for the US. Rebuilding the quake-damaged country will surely take priority.
Meanwhile, China is putting more emphasis on domestic consumption. This will mean allowing the yuan to strengthen versus the dollar and less frantic buying of US government paper as a result. This suggests that China too will be less ready to help out a friend in need.
If we look at the US government's massive spending as an investment, the payoff is obviously and hugely negative. GDP growth - albeit largely phony - comes to only about $500 billion this year. That's a net loss to the economy of $1.5 trillion, more or less.
Of course, it's not an investment at all. It's a subsidy. And like all subsidies, the economy adapts. And then becomes dependent.
Last year, the Obama administration estimated the budget deficit for the current year at $900 billion. They were off by nearly 100%. The budget deficit is now estimated to be $1.7 trillion - and it could rise. Out of every dollar spent by the US government, 43 cents, not 26 cents as Obama's team estimated, will be borrowed. How's that for budget control? And this is in a year when the economy is growing and, according to the official storyline, "recovering."
The stimulus efforts are clearly failing to stimulate economic growth, but they are succeeding very well at debasing the dollar.
Our colleague in London, Dominic Frisby, makes an interesting point:
If you take the Nikkei and measure it in dollars, or take the Dow and measure it in Japanese yen, the performance has been virtually identical over the last two years.
In other words, the Dow's great rally has been an illusion caused by a falling dollar. And the Nikkei's slump an illusion caused by a rising yen. Whether you are a US investor buying Japanese stocks or a Japanese investor buying American stocks, you get the same result. Currency movements are distorting what is really going on in the equity markets.
Or to put it another way, the buoyant US stock market is hiding the profound weakness of the US dollar. This weakness has not spiraled into a crisis yet.
But suppose the dreaded double-dip recession comes? Suppose another earthquake, another revolution, or some other surprise, causes a resumption of the bear market on Wall Street? Suppose the budget deficit goes to $2 trillion - as forecast by former OMB director David Stockman?
Business, investors and households adjust to the extra money. No longer like WD40, intended to loosen the nuts and bolts of a cranky economy, the liquidity becomes more like diesel fuel. Then it is practically impossible to take it away. Shut off the supply of fuel and the machine stops.
The only sure way to keep the juice flowing is by means of the QE program. That is why Marc Faber expects QE2 to lead to QE3 and QE4...up to QE18.
We're not so sure it will go that far. The system, such as it is, might just blow up first.
Regards,
Bill Bonner,
for The Daily Reckoning
Joel's Note: "Long Suffering" readers will recall a time, not so very long ago, when Bill issued his first trade of the decade: Buy gold, sell stocks. That was 2000, when an ounce of gold was going for about one sixth of the price it reached this morning...and before the stock market crashed...twice.
Needless to say, Bill's first Trade of the Decade proved to be quite a call. His new book, Dice Have No Memory: Big Bets and Bad Economics from Paris to the Pampas, tracks the decade of thinking and reckoning that provided the backdrop over which its success unfolded. Not surprisingly, therefore, it has already shot to #1 on Amazon in three separate categories. If you'd like to add a copy to your own home library, you can pick one up here.
In the meantime, readers interested in what Bill is doing with his own money - how he is safeguarding the family wealth against government- backed stupidity - might like to check out his Bonner & Partners Family Office project. It's a fascinating endeavor, one designed to help folks grow and protect their wealth over generations...not just a few months or years. Interested parties may apply for membership here. It must be said, however, that not everyone will qualify. Just a heads up. Uncovered: A Way to Tap into an "Other" Pool of Government-Backed Income Potential...
..that only a handful of Americans know about.
And with Social Security becoming less and less of a guarantee, now is the time to act.
Click here now and discover a way to protect your retirement from the uncertainties surrounding Social Security.Bill Bonner It’s All Transitory: How Inflation Seeps Into the US Economy Reckoning from Baltimore, Maryland...
Would you like to litter in a national park or blow up a Homeland Security office? This may be your big chance...
The government might have to shut down on May 16th. Is that bad news? A lot of people don't think so...more below...
Meanwhile...
Worried about inflation? Don't be. That was Ben Bernanke's message yesterday. Bloombergwas on the case:Federal Reserve Chairman Ben S. Bernanke said he expects an increase in commodity prices to create a "transitory" boost in US inflation and that the central bank would act if he's proven incorrect.
Of course, if you'll recall, the feds told you not to worry about the crisis of '07-'09 too. They're not necessarily the most reliable market forecasters. But who's reliable when it comes to making predictions? Especially about the future?
"So long as inflation expectations remain stable and well anchored" and commodity-price increases slow, as he's forecasting, then "the increase in inflation will be transitory," Bernanke said today in response to audience questions after a speech in Stone Mountain, Georgia.
"We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability," he said.
He told lawmakers March 1 that Fed officials "continue to monitor these developments closely and are prepared to respond as necessary," while the FOMC said on March 15 that it "will pay close attention to the evolution of inflation and inflation expectations."
On the other hand, if the feds don't know when inflation is coming, who does? After all, they're the ones responsible for it. Inflation is always a monetary phenomenon, said Milton Friedman. And the feds control the money, don't they?
Well, yes...and no.
Today, we continue to step back...to see the bigger picture. It's easy to get distracted by the details. You begin to lose sight of what is really going on.
In a word - the Great Correction is still doing its work. But the picture is greatly distorted.
The Fed says that the core inflation rate is still under 2%...
But you will pay as much as $4 for a gallon of gas.
Corn...oil...wheat...all are hitting records. Silver is at a 31-year high. And look at stocks.
It's as if the world economy were booming!
The Fed says these increases are "transitory." It could be right; much bigger inflation numbers could be on the way.
On the surface, it looks simple enough. The Fed prints money to fight the Great Correction. The money goes into the banking system. Then, it seeps into the economy, right? Inflation, right?
Well, not exactly. Our Family Office investment guru, Rob Marstrand, points out that the "money" put into the system is not really going into the consumer economy - at least, not directly. Instead, the money has been going into bank "reserves"...sitting at the Fed, doing nothing.
Generally, the more money in "reserves," the more sluggish the economy becomes (since this money is effectively sidelined, rather than being put to work...building...hiring...spending...).
The banks buy US Treasurys from the feds. The Fed "prints" money; it buys US Treasury debt from the banks. The banks take the cash and use it to build their reserves. The government takes the cash and uses it to cover its deficit spending.
So, it's not the Fed's cash that is pushing up prices directly. Instead, speculators are guessing that all this new cash will EVENTUALLY cause consumer prices and investment assets to go up. They are looking ahead...and exchanging cash for something they think will give them more of a return.
This is not to be confused with a genuine recovery. It's something very different.
The feds try to stop a correction by putting in a lot more money they don't have...and a lot more credit the economy doesn't need. They say unemployment is going down (this, they arrange, largely by not counting people who've simply given up looking for work).
As for those who are working, the Wall Street reports that they aren't exactly getting rich either:
"Wages fail to keep up with inflation," is the headline.
Of course, housing prices are still going down.
The confusion continues, in other words...with the feds desperately trying to push up prices and the Great Correction pushing them down.
Where will it lead? Again, looking at the big picture, the feds will keep putting in cheap cash and cheap credit... and then "eventually" will come. The feds will win this battle...
...and wish they had lost.
And more thoughts...
Why will they wish they had lost? Because a "normal correction" - even a great one - is a lot less painful than a hyperinflationary depression. That's what happens when all those bank reserves, and all those overseas dollars, are suddenly dumped on the market.
It will happen; at least, that's our story for now. And when it happens, it will happen fast. Maybe next year...maybe 5 years from now. Stay tuned.
*** The government will have to shut down on May 16th, says Treasury Secretary Tim Geithner. That's when he thinks the debt ceiling will be reached. And since the government runs on borrowed money, if it can't borrow it will have to turn out the lights and close the doors.
A report circulated yesterday that said that during the month of March the feds spent 8 times as much as they collected in taxes. An atypical month, to be sure...but maybe an evil portent.
Word on the street is that a lot of people would like to see the government out of business - at least, temporarily. The Tea Partyers think it will send a message to the nation...and make it easier to cut big chunks out of the budget. The Democrats want to see the government shut down because they think the voters will be appalled, undermining support for the Republicans.
For our part, we just want to see what would happen.
Probably nothing. But if you're itching to set fire to a national forest...rob a regional federal reserve bank...or blow up a post office...
Mark your calendar!
Regards,
Bill Bonner
for The Daily Reckoning
Thursday, 7 April 2011
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